The money you earn from your job—your income—is all that you pay taxes on, right? Nope. The IRS considers many other things income, and we’re not talking about the (tiny) interest on your savings account.
If you were one of the millions of Americans who collected unemployment benefits in 2011, you may be surprised to discover that you’ll need to pay taxes on those benefits. You should have already received a form 1099-G to help you with your tax filing.
Another benefit that you may find yourself getting taxed on when you file this year are Social Security benefits. If you work in retirement while you collect Social Security, after a certain income-level, those benefits become taxable. Your tax rate depends on a sliding scale, based on your earnings. You start having to pay taxes on a portion of those checks when you earn $25,000 as a single filer and $32,000 as joint filer. Working and earning in retirement can be a great way to maintain your quality of life or start a second career, but make sure to look into possibly postponing collecting Social Security if the tax-bite is too big.
Talking down credit card debt into settling for less than you owe can seem like sometimes mega-savings. But, those savings qualify as income—income that is taxed. Forgiven debt, according to the IRS, is qualified income, so if you settled any debt or had debt dismissed, you should receive a form 1099-C in the mail to declare these earnings on your taxes. However, there is one type of forgiven debt that thankfully does not mean a tax bill. If you foreclosed on your primary residence or had to short-sell your home, according to the Mortgage Forgiveness Debt Relief Act of 2007, you most likely will not have to pay taxes on that forgiven debt.
And if in 2011 you changed your family status with a separation or divorce, you may be surprised to learn that alimony payments that you receive are also taxed as income. On the flip-side, if you’re the one making alimony payments, qualifying payments mean a tax deduction for you. If you were the spousal beneficiary of a life insurance policy, you’re in the clear regarding taxes—your life insurance proceeds should be federal and state tax-free. However, if your policy was in the millions and/or you were a beneficiary but not a spouse, you may fall under estate tax rules.
One more type of insurance coverage that can be considered income is long-term disability (LTD) coverage. The tax rules vary on LTD, depending on who’s paying the premiums (you or an employer) and how much of your income it’s replacing.
The best way to avoid tax-surprises come April? Know what’s considered income and research the rules.
Got a tax tip you want to share or a question? Tweet @carmenwongulric, #OnFile.